What's missing from the 'boom'

The current cycle of economic expansion has reached 74 months and is now tentatively the longest in Japan’s postwar history, according to the government’s monthly economic report for January. Since the boom cycle corresponds to the second administration of Prime Minister Shinzo Abe, who returned to the government’s helm in December 2012, administration officials are touting the benefits of the extended boom, such as an improved job market and corporate earnings, as the fruits of the prime minister’s trademark Abenomics policy. And indeed they may be. But the generally modest growth over this period also reflects what has not been achieved under Abenomics.

The nation’s workforce has increased by 3.75 million during this boom cycle — close to the number of jobs created during the asset-inflated bubble boom from the late 1980s to the early 1990s. With brisk demand backed by strong corporate profits, combined with the intensifying manpower shortage in the rapidly graying population, the labor market is now the tightest it has been since the mid-1970s — there is an average of more than 1.6 job openings for each job seeker. Listed companies have been posting record profits for several years, and the Nikkei average on the Tokyo Stock Exchange has more than doubled. With the government taking steps to promote inbound tourism as a key growth sector, the number of foreign tourists has more than tripled to top 30 million last year.

On the other hand, economic growth has been much more moderate than in past boom cycles. Average annual GDP growth has come to a mere 1.2 percent — lower than the 1.6 percent during the previous longest boom from 2002 to 2008, and a far cry from the 5.3 percent during the bubble or the robust 11.5 percent in the Izanagi boom from 1965 to 1970, when strong demand for consumer durables backed by people’s rapidly rising income shored up the economy. Despite the robust corporate earnings and the tight labor market, growth in inflation-adjusted net wages has stagnated. As a result, consumer spending grew only 0.4 percent a year on average. Meanwhile, the 2 percent annual inflation target, set by the BOJ and the government in 2013 as a benchmark for busting deflation, remains nowhere in sight — though the nation is now certainly out of the deflationary spiral of continuous price declines that stifled economic activity.

A large part of the ongoing economic expansion has been supported by the Bank of Japan’s massive monetary easing operation, the weaker yen and the surge in share prices that it triggered, and strong demand in overseas markets. On the other hand, structural reforms, deregulation and measures to bolster new industries — which were supposed to comprise the “third arrow” of Abenomics along with monetary easing and fiscal spending — have so far had little effect in generating new sources of economic growth. Average growth during the current boom cycle has been little above the nation’s growth potential, which is believed to have come down to around 1 percent annually due to the rapidly graying and shrinking population, and there’s little indication that the economy’s potential to grow has been raised through reform measures or productivity increases.

The Abe administration has identified the population decline and aging — which lead to a shrinking domestic market and cast doubt on sustainability of the social security system — as a national crisis. But measures to extend support for young couples in having and raising children have not had much immediate effects in addressing the demographic woes. In a major turnaround in immigration control policy that had (at least officially) prohibited allowing in foreign workers to perform manual labor, the government is opening the door wider in April in response to demands from industrial sectors having trouble securing enough manpower. However, the nation’s population is falling at a pace much faster than the expected inflow of foreign workers.

Now uncertainty is deepening over the course of the world economy, due in part to the effects of the trade war between the United States and China. Major companies that kept earning record profits thanks largely to robust demand in overseas markets expect a sharp slowdown in their profit growth. The January monthly report in fact downgraded the assessment of the world economy for the first time in 35 months, and the Chinese economy, which grew 6.6 percent in 2018, the slowest in 28 years, was assessed to be in a moderate slowdown.

To convert the growth into one driven by robust domestic demand, more significant wage hikes to shore up consumer demand are needed, along with accelerated efforts to develop new growth sectors through structural reforms and deregulation. This is where Abenomics has been lagging the most.